Capturing Theta - A Delta Neutral Theta Decay Strategy - Experimentation
This experiment is recorded for the purposes of checking the principle of capturing theta decay if possible by making a Delta neutral strategy.
The experimental stock taken up for this purpose is YES Bank which is trading around Rs.368 per stock as of close 29th Nov 2013 (November month end close).
The various Option Geeks for this Stock are observed as below for a 360 PUT and a 380 Call for December 2013 Option expiry
YESBAN : Quoting around Rs.368 as of close of November 29th 2013:
By writing a 360 PUT and a 380 call we gain a Theta of 80 paise approximately per day.
The above strategy has a Delta of 8 paise that means for every 1 Rs movement the option price combined will move by 8 paise and will simultaneously be losing 80 paise per day as theta .
This means as well a stock movement of Rs.10 on either will get nullified by decaying equivalent theta. (A 10 Rs movement would give 80 paise Delta which gets nullified by a decaying theta of 80 paise--> Is this statement correct to say?)
Assuming we executed this on 2nd December 2013, as Delta is almost neutral, by 10 days down the line ie., on 12th December 2013 ( Thursday) the option price should fall by 80 paise * 10 days ie., both put to gether will lose 8 Rs.
This means selling the above strategy on 2nd December 2013 at Rs.31 we should be buying back it at Rs. 23 (31-8 = 23 Rs) per stock on 12th December 2013 .
This would leave us a profit of Rs. 8 per stock which is for a lot of 500 stock Rs.4000/-
So this article is written down here to see update on 12th Nov 2013 how it works out.
cheers
zilebi
This experiment is recorded for the purposes of checking the principle of capturing theta decay if possible by making a Delta neutral strategy.
The experimental stock taken up for this purpose is YES Bank which is trading around Rs.368 per stock as of close 29th Nov 2013 (November month end close).
The various Option Geeks for this Stock are observed as below for a 360 PUT and a 380 Call for December 2013 Option expiry
YESBAN : Quoting around Rs.368 as of close of November 29th 2013:
| STRIKE | PUT/CALL | OPT-PRICE | Volatility | Delta | Theta | Gamma | Vega |
| 360 | PUT1 | 14.4 | 51.82 | -0.38 | -0.33 | 0.01 | 0.37 |
| 380 | CALL | 16.65 | 52.79 | 0.46 | -0.46 | 0.01 | 0.38 |
| 31.05 | 104.61 | 0.08 | -0.79 | 0.02 | 0.75 |
By writing a 360 PUT and a 380 call we gain a Theta of 80 paise approximately per day.
The above strategy has a Delta of 8 paise that means for every 1 Rs movement the option price combined will move by 8 paise and will simultaneously be losing 80 paise per day as theta .
This means as well a stock movement of Rs.10 on either will get nullified by decaying equivalent theta. (A 10 Rs movement would give 80 paise Delta which gets nullified by a decaying theta of 80 paise--> Is this statement correct to say?)
Assuming we executed this on 2nd December 2013, as Delta is almost neutral, by 10 days down the line ie., on 12th December 2013 ( Thursday) the option price should fall by 80 paise * 10 days ie., both put to gether will lose 8 Rs.
This means selling the above strategy on 2nd December 2013 at Rs.31 we should be buying back it at Rs. 23 (31-8 = 23 Rs) per stock on 12th December 2013 .
This would leave us a profit of Rs. 8 per stock which is for a lot of 500 stock Rs.4000/-
So this article is written down here to see update on 12th Nov 2013 how it works out.
cheers
zilebi
Update on 12th December 2013: Thursday!
ReplyDeleteThe 360 put was quoting around 7 Rs and 380 call was quoting around 14 Rs Totalling 21 Rs. This means if we closed this call we got Rs. 31-21 = 10 Rs. * 500 LOT = 5000/- Rs Net Profit
So we achieved the Theta Decay by keeping the Delta neutral.
We see for next month which stock we can analyze for similarity !
cheers
zilebi